Key Sections of Licensing Agreements

by | Apr 12, 2021 | Contract Compliance, PKF Texas - The Entrepreneur's Playbook®, Tax and Accounting Desk

Jen: This is The PKF Texas – Entrepreneur’s Playbook®. I’m Jen Lemanski and I’m here today with Carlos Gomez, an Audit Manager and one of the faces of our PKF Texas Contract Compliance Services team. Carlos, welcome back to the playbook.

Carlos: Hi, Jen.

Jen: So, previously we’ve talked about licensing agreements. Can you walk me and our viewers through the key sections of licensing agreements?

Carlos: Some of the big areas to keep in mind are what defines gross sales, your royalty rates, the terms, the length of term for the agreement, your audit clause and other things, like what’s authorized territory, products, those types of things.

Jen: Where do royalty rates and minimum guarantees come in? How are those determined, and how does that impact an agreement?

Carlos: Those are usually based upon the projection of what that third party can provide. You know, sometimes they have an idea of what the product can sell for because they may sell similar products. But sometimes it takes you to do a little bit independent market research or look at studies. Like, there are some organizations that put together royalty rates from the prior year based on industry and what the typical rates you should be looking for.

Jen: What kind of added value does that bring to the table?

Carlos: Based upon how the royalty rates work – and it’s all subjective based on the type of products or different territories that you’re selling in – but you could get stuck in a long-term agreement where you’re not making as much revenue as you should, because the territory is too big or the length of the agreement’s too long, and your minimum guarantees aren’t set up the way that they need to in the beginning.

Or if you ever have a concern, you know, you want to do a short-term agreement, three to five years, and you’re not sure if this venture is going to work out. So, sometimes minimum gains, larger minimum guarantees are better in the beginning so that you ensure that you get the most value out of the contract.

Jen: Perfect. Well, we’ll get you back to talk a little bit more about some other contract compliance service information. Sound good?

Carlos: Yep. Thank you, Jen.

Jen: This has been another thought leadership production brought to you by PKF Texas – The Entrepreneurs Playbook®. For more information about Contract Compliance Services, visit Tune in next week for another chapter.

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